Wednesday, August 17, 2011

TPS - Founders of Euro - Tommaso Padoa-Schioppa

Ignazio Visco: Tommaso Padoa-Schioppa, “Architect …”

Personal remarks by Mr Ignazio Visco, Deputy Director General of the Bank of Italy, at the Ceremony in memory of Tommaso Padoa-Schioppa, European University Institute, Badia Fiesolana, 28 January 2011.

"A prominent (but non-academic) economist, a leading central banker (in Italy and in Europe), a “non-political” politician (dedicated to the “polity” rather than to the politique politicienne), Tommaso Padoa-Schioppa spanned all of these professions in the course of his eminent career. Tommaso’s achievements were substantial, as everyone recognizes. He is rightly considered as one of the “architects of the euro.” A man of vision, an independent mind, an indefatigable civil servant – we have been fortunate indeed to have had Tommaso Padoa-Schioppa as colleague, friend, mentor..."

"...In 1981, while Tommaso was serving with the European Commission, an epoch-making regime shift took place, to which he had contributed directly and indirectly: the so-called “divorce” between the Bank of Italy and the Treasury. The Bank ceased to act as residual buyer at Treasury bill auctions, the fundamental first step towards full independence for the Bank’s monetary policy decisions. This was followed in the 1980s by a thorough transformation of the financial infrastructure: direct controls were suppressed, reserve requirements reformed, competitive-bid auctions for Treasury bills introduced, longer-term Treasury bonds (with the introduction of uniform price auctions) and indexed Treasury credit certificates were instituted, a screen-based secondary market was established for government securities (the MTS, with the introduction in 1994 of market specialists) as well as a screen-based market for inter-bank deposits (later to become the e-MID), futures and options on Treasury bonds were launched on LIFFE, and more. Tommaso Padoa-Schioppa contributed much of his time, energy, and vision to these radical changes.

Many other changes took place over those same years. The European Monetary System (EMS) was established, in the second half of the 1980s exchange controls were removed and capital movements were completely liberalized (by 1990), the Bank of Italy was granted not only de facto but also de jure independence, the wage indexation system was substantially revised and eventually put to rest, and a major currency and financial crisis struck the Italian economy as budget deficits and the public debt seemed to be out of control. Eventually, of course, the crisis was overcome, inflation was tamed, the public finances were brought under control. This is clearly another story, one that took a benign turn thanks also to the many infrastructural changes that had made it possible for monetary policy to play its proper role within a transparent and well-organised financial architecture...."

"...In the mid-1980s the payment system, and not only in Italy, was rather neglected and far from well-organised. Tommaso was convinced that central banks’ tasks should comprise not only money creation and inflation targeting but also improving the mechanisms of monetary circulation, instituting reliable and efficient infrastructures, and what is now called “transaction banking”. In a market economy the costs of a dysfunctional payment system could be just as great as those deriving from volatile inflation rates. This was particularly evident in Italy, where at the time the settlement of cheques or the completion of a credit transfer were long and cumbersome processes that involved a fragmented set of bilateral arrangements among banks..."

"...Eventually, the system was adapted to be fully integrated into the network of euro-area payment systems (the TARGET structure)."

[Mrt: I always wondered about where the TARGET came from :o)]

"...At the time he was deeply involved in the process of European monetary unification and soon realized that the creation of a single currency would have to be accompanied by the institution of a unified mechanism for its circulation throughout the European economy. A workshop that he organized at the Bank’s conference centre in Perugia (SADiBa) in November 1991 revealed how fragmented the procedures and mechanisms of the various European countries were and paved the way for the payment system agenda of the years following. From 1991 to 1995 Tommaso chaired the Working Group on Payment Systems of the central banks of the European Community; he resumed this project when he joined the Governing Council of the European Central Bank. In that position he promoted a revolutionary arrangement by which each country would delegate the large-value settlement of inter-bank transactions to a centralised system run by three central banks on behalf of the entire Eurosystem. This is how TARGET was revolutionized, transformed into a highly efficient, secure single shared platform for the benefit of the European financial system (TARGET2, created and jointly managed by the Bank of Italy, the Deutsche Bundesbank and the Banque de France). His worldwide leadership in the area of payment systems received an important recognition when he was nominated Chairman of the Basel Committee on Payment and Settlement Systems, a position that he held from 2000 to 2005...."

"...So Tommaso Padoa-Schioppa has been widely identified as a (if not the) “founding father of the new currency,” “architect of the euro”. I believe that this is proper, but I wanted to emphasise that Tommaso was also deeply convinced of a notion clearly expressed by James Tobin, namely that as “Policy and structure become inextricably combined, their joint product is what matters. … One way to alter the operating properties of the system … is to change the policy rule. Another way is to change the structure”...."

"...In the same lecture Tommaso returned to another recurrent theme of his, the need to move beyond the level of the “nation state” – in this case in order not to leave “the rapid emerging reality of global finance” unmanaged..."